Abstract
Distressed debt is a large and growing segment of the fixed-income market. In this article, the authors expand the empirical basis for active management with evidence on risk and reward. They calculate a one-year default rate of 22% for the category, whether defined by spread or by price. That rate is more than 20 times as high as non-distressed speculative-grade debt. They also address the longstanding question of whether non-distressed investors should automatically take losses on bonds that fall below a stated price threshold. The evidence on price change argues against this strategy, based on a threshold of 70, but the cost of continuing to hold is a higher default rate than many investors can tolerate. Finally, a strong correlation indicates that distressed investors earn the highest returns on the lowest-priced bonds, but there is a severe penalty for selecting the wrong issues.
- © 2008 Pageant Media Ltd
Don’t have access? Click here to request a demo
Alternatively, Call a member of the team to discuss membership options
US and Overseas: +1 646-931-9045
UK: 0207 139 1600